With MannKind (NASDAQ: MNKD) having finally gained Food and Drug Administration approval for its inhaled insulin Afrezza, you'd think the hard part was behind the company.
Now that it's approved, MannKind has to convince doctors to prescribe Afrezza.
Black box warning
It's not as bad as it sounds. There's no skull and crossbones.
Having the first two bullet points on the label shouldn't affect sales of Afrezza because doctors of patients with lung diseases probably wouldn't prescribe inhaled insulin even if the warning wasn't on the label.
The third point about getting a lung test, spiromentry, before starting on the drug is a bit of a barrier, since it's an added step that doctors don't have to do if they prescribe injected meal-time insulins, Novo Nordisk's (NYSE:NVO) Novolog and Eli Lilly's (NYSE:LLY) Humalog.
And unfortunately the lung test isn't a one-time thing. If you dig deeper into the Warnings and Precautions section, it advises doctors to follow-up with a lung test "after the first 6 months of therapy, and annually thereafter, even in the absence of pulmonary symptoms." The tests aren't a deal breaker, but lazy doctors aren't going to like the added steps and neither are doctors that are safety conscious, considering the "even in the absence of pulmonary symptoms" the FDA threw in there.
On the efficacy side, there weren't any surprises. Afrezza was approved for both type 1 and type 2 diabetics. For type 1 diabetics switching from Novo Nordisk's and Eli Lilly's insulins, the company had to go back to the four-to-one conversion, but that doesn't seem to be that big of a deal since it was the conversion used in the clinical trials. It was pretty clear the FDA wasn't happy with the proposed change.
In type 1 diabetes, the label says that Afrezza is non-inferior to Novolog. Unfortunately it also points out that the patients taking Novolog saw their HbA1c -- a measure of long-term blood glucose levels -- drop more than patients taking Afrezza: 0.4 points versus 0.21 points. More patients in the Novolog group also reached the goal levels of HbA1c than in the Afrezza group: 27.1% versus 13.8%.
Surprisingly absent from the efficacy section is mention of how Afrezza causes fewer hypoglycemia events than Novolog. In the phase 3 trial, there were 8.9 hypoglycemia events per subject-month in patients taking Afrezza compared to 13.97 for those taking Novolog. MannKind argues that Afrezza causes fewer events because the drug leaves the blood stream quicker, but it's hard to know for sure since the drops in HbA1c levels weren't equivalent .
Beyond the convenience of inhaling versus injecting, the main selling point of Afrezza is its profile, which better mimics the natural insulin levels during meals of non-diabetics. A lack of differentiation on the label is going to make it a harder sell for type 1 diabetics.
The efficacy data for the type 2 diabetes is cleaner, pointing out that Afrezza beat placebo in both overall HbA1c decline and the goal-reaching measurement. While it's only a comparison to placebo and not an active comparator, the data are appropriate for the market that Afrezza should have the easiest time going into: type 2 diabetics that aren't at their HbA1c goal on oral diabetes medicines, but who have resisted going on insulin because they don't want to inject themselves.
With a market cap of $4.2 billion -- higher if you include options and warrants -- there are more than $800 million in annual sales already baked into the valuation if you assume a price-to-sales ratio of five. If sales are fast growing, you cloud see justifying a P/S ratio of 10, so if MannKind can ramp up to $400 million in sales quickly, its valuation is reasonable.
Given the large market, capturing $400 million in sales seems achievable, but investors shouldn't count on it happening quickly. The initial adopters are likely to be mainly new-to-insulin type 2 diabetics, a small subset of total diabetics. As doctors gain experience with the drug, Afrezza could get expanded into patients already on insulin, but that's going to take time; given the potential lung issues, doctors will be cautious about prescribing it for a large number of patients until they have real-life experience with Afrezza.